Up until Friday afternoon before the Alpari bankruptcy, a report on the drastic decline of the euro against the Swiss franc was still available on the website of the broker Alpari. What the online editors did not know when creating the report: The broker himself had to file for bankruptcy a little later due to the drop in the price. What happened to the company? Did the investors get their money back? What do traders learn from it? And why is a broker campaigning for customers again today at Alpari.com?
The most important questions about the Alpari bankruptcy
- How did it go bankrupt?
- Who is to blame for the collapse?
- What did that mean for Alpari customers?
- What do traders learn from bankruptcy?
- Who is behind Alpari today?.com?
This led to the Alpari bankruptcy
For several years, the exchange rate of the Swiss currency against the euro - or in other words, the euro lost in Compared to the franc in value. In October 2007 you could get 1.68 Swiss Francs for one euro, in 2011 it was only partially 1.18. The appreciation reduced imports into Switzerland and made Swiss products more expensive, which many observers saw as a burden for the local economy.
The Swiss central bank therefore committed to keeping the euro above the CHF 1.20 mark. For this, she bought euros herself and paid in Swiss francs. However, this policy led to a flood of money, so the central bank ended the experiment on Thursday. The euro then fell by around 20 percent and was in some cases even less than CHF 1.00.
Many investors suffered such losses that they were no longer covered by their deposits. The broker had to assume the debt, which overwhelmed some companies, including the British Forex and CFD broker Alpari.
Why were the losses so high?
The high losses are mainly to be explained by the leverage customary for CFDs and foreign exchange. Traders often only have to deposit a small part of the actual value of the position, the so-called security deposit or margin. A margin of 0.5 percent means a leverage of 200, because 200 times what you have to deposit is traded.
Unless the broker does not explicitly waive the obligation to make additional payments, the losses are by no means limited to the deposit. This distinguishes CFDs and Forex from knock-out certificates. In the case of the appreciation of the Swiss franc, the loss was often 20 percent. However, since often only 0.5 percent of the price loss was covered by the security deposit, the remaining 19.5 percent had to be paid later. So traders lost 40 times their stake. For example, anyone who invested 1,000 euros had to cope with losses of 40,000 euros and had to shoot 39,000 euros. Of course, many traders were overwhelmed with this.
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Who is to blame for the collapse?
Guilt is hard to say, but mistakes were made in at least three places.
So the Swiss central bank has to put up with the question of whether the hard exit was necessary. The current policy could not have been continued forever, but an exit in steps would have been conceivable, for example, first a new course of 1.15 euros, then 1.10 and so on. Other critics go even further, the central bank shouldn't have set an upper limit for the value of the franc.
But Alpari also apparently made mistakes. The broker was not completely unprepared, the positions were automatically canceled when the price crashed, but no seller was found. Nobody wanted to buy, there was only demand again at a value of around one euro per franc, but by then it was already too late. But the company, which also sponsored the football club West Ham United, has to be asked whether the risk should not have been recognized and countered, for example through lower leverage for this currency pair. That was what some sister companies of Alpari UK had done, for example Alpari Belize. They survived the crisis, but more on that later.
But also the investors who bet on a rising euro must listen to criticism. Apparently it was a surefire business because the central bank's policies prevented the euro from falling below 1.20. Those who bought at this rate seemed to be only able to win.
But experience has shown that there are no guaranteed profits. Market interventions in particular often make the development all the more violent after a while. Many investors have apparently forgotten that.
What does this mean for Alpari customers?
Alpari customers were lucky because the broker was regulated by the British FCA and was subject to the EU regulations. Thus, all customer deposits were stored in separate accounts, strictly separated from the broker's funds. The creditors have no access to this money, it does not go into the bankruptcy estate, but is repaid to the customers.
Alpari was also a member of the British Financial Services Compensation Scheme, which, in an emergency, deposits customers up to 50,000 Pounds (around 65,000 euros) hedged.
In fact, all traders were refunded their deposits, even if the settlement of Alpari UK took longer than initially hoped. The auditing company KPMG led the company through bankruptcy and paid out the last customers in the second half of 2015.
The traders, of course, were unlucky because they suffered high losses due to the appreciation of the Swiss franc. Even the bankruptcy of Alpari hadn't changed that.
What can traders learn from Alpari bankruptcy?
Traders should learn two things from Alpari bankruptcy. On the one hand, it is important to choose a broker who keeps customer funds separate from their own credit and is ideally a member of a compensation scheme. This applies to all brokers from EU countries, but not to all from other countries. Unfortunately, the Alpari case also shows that even serious companies are not safe from bankruptcy because the British had a good reputation.
Not all deposit insurance funds are equally good. Ideally, it is a large and economically sound country. This applies to the UK, deposit insurance funds from other countries such as Bulgaria or Cyprus are considered less secure.
The crash of the euro against the Swiss franc also shows that there are no secure transactions on the securities market. Where money can be made seemingly risk-free, there is usually a particularly high risk. Suppressing market development is like building a river: if the dam breaks, the force is greater.
Unfortunately, the fall of the euro against the Swiss franc is also an example of how the usual security mechanisms do not always work. Many traders set stop losses to avoid excessive losses. The positions should be released automatically as soon as the deposited money is used up.
Basically, such stop rates are not a bad idea. In this case, however, they failed because the crash was so huge that there was temporarily no trading. Anyone who wanted to sell their euro position at a rate of CHF 1.1955 found no demand. It was only when the euro was less than CHF 1.00 that there was trading again. The losses were already high.
Nevertheless, setting stop prices is usually good protection, but you should always be aware that it can not be enough in extreme situations.
More security: avoid high losses
How can traders avoid losses that some traders experienced after the Swiss franc was released? There are different answers depending on your risk appetite.
1. Trading shares and certificates
Of course, an easy way is to trade shares or certificates. Some derivatives, such as futures, can also be very high risk, but with most products, traders cannot lose more than they invested. That goes for shares, of course, but also for warrants and many certificates.
If you like to trade with a lever, you can also buy knock-out certificates. Knock-out certificates are therefore also referred to as leverage certificates. With a leverage of x10, losses and gains are ten times higher than when buying the underlying. This is little compared to the levers in CFD trading, but losses are limited to the purchase price, there is no obligation to make additional contributions.
This type of investment is particularly attractive for medium-term investors, with day trading the fees can be quick get high.
2. Choosing brokers with no obligation to make additional payments
CFD trading is usually more suitable for those who trade at short notice and want high leverage than buying knock-out certificates via a regular stock broker. Some brokers also want to avoid the obligation to make additional payments. German providers in particular often refrain from claiming losses beyond the margin, for example Consorsbank, Flatex or comdirect. At comdirect, the broker's waiver must be applied for separately, and the leverage then decreases.
In principle, positions are automatically canceled for all brokers without the obligation to make additional contributions when the margin is almost used up. The broker only steps in if the losses still exceed the security deposit. For some, like for Admiral Markets, the waiver is also an accommodation that cannot be claimed. Traders should therefore inform themselves before choosing the broker.
3. Trading Binary Options
If you like to trade on short notice, but want to avoid additional margin, binary options can be a good choice. Because here the stake can be lost at most. Some brokers even offer loss protection where part of the money is repaid even if the option is out of the money. However, the potential gains are of course lower.
When trading binary options, traders receive a fixed profit as soon as the option is in the money, regardless of whether the target price was barely or clearly reached. If the option is out of the money, they usually lose everything - sometimes minus the loss protection.
Binary options offer both the opportunity to trade on short notice and hold positions over several days, sometimes even weeks. Your advantage is the combination of high chances and the limitation of the maximum loss to the stake.
Who is Alpari today?
The question remains, why is it still today at Alpari.com a broker of the same name. The answer to that is simple. Only the British subsidiary was affected by the bankruptcy at the time, Alpari.com is now operated by Alpari Belize as well as Alpari St. Vincent and the Grenadines.
In principle, Europeans can also become customers of Alpari. But just a glance at the languages offered shows that Germany is not one of the target markets. Many are not even written in Latin. The broker is very active, for example, in Nigeria, Russia and other successor states of the Soviet Union and in Indonesia.
German traders not only have to do without German-language support, but also the advantages of EU regulation. In most cases, other brokers should be the better choice.
The bankruptcy of Alpari UK shows two things. On the one hand, traders should value a reputable and EU-regulated broker. Then you will benefit from deposit protection and other EU-wide regulations to protect customer deposits. Protection from high additional claims is even more important, however, because the high leverage means that losses can quickly amount to a multiple of the deposit. Customers can protect themselves by choosing a broker with no margin requirement or by trading binary options. Stocks and ETFs are better suited for long-term investment. Some sister companies of Alpari have survived the appreciation of the Swiss franc, but German customers are not among their target group.